Washington, D.C. — Silvergate Capital Corp. has agreed to pay a hefty $50 million to settle charges by the Securities and Exchange Commission (SEC), which accused the firm and its key executives of misleading investors about its compliance protocols and customer monitoring capabilities. This agreement comes amid heightened scrutiny from federal and state regulators.
The SEC’s allegations centered around claims that Silvergate Capital, its subsidiary Silvergate Bank, and two former officials, including the CEO, provided false assurances about the robustness of their Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) systems. Particularly in focus was the firm’s relationship with cryptocurrency exchange FTX. Authorities suggested that FTX may have misused Silvergate accounts, a potential oversight that could have been flagged by a more effective monitoring system. Silvergate’s systems reportedly failed to effectively oversee more than $1 trillion in transactions via the Silvergate Exchange Network.
The settlement covers a critical period between November 2022 and January 2023, during which the alleged oversight and misinformation occurred. Under the terms of the settlement, former Silvergate CEO Alan Lane faces a $1 million penalty, while former Chief Risk Officer Kathleen Fraher must pay $250,000. Both are also subject to five-year bans from serving as officers or directors of any public company, alongside binding injunctions against future violations.
Simultaneously, federal and state regulatory bodies, including the Federal Reserve Board of Governors and the California Department of Financial Protection and Innovation, have taken parallel actions. They are collectively demanding an additional $63 million in fines related to the bank’s crypto operations and monitoring failures.
These federal and state actions, although not directly tied to the FTX debacle, underscore the broader regulatory concerns regarding Silvergate’s operational and oversight capabilities. Notably, Silvergate may mitigate some of the financial burden imposed by the SEC settlement using the amounts paid towards the fines levied by these parallel actions.
The developments contribute to the stormy season that Silvergate weathered leading up to its collapse in March 2023. The downfall followed a precipitous drop in share price after the company delayed its annual financial report and disclosed ongoing investigations by the Department of Justice.
Adding to the company’s woes, the SEC also accused former CFO Antonio Martino of misleading investors regarding the financial impact of expected losses from securities sales following FTX’s implosion. Martino, who has not yet reached a settlement, faces charges for violations of federal securities laws.
This unfolding saga highlights the increasing challenges and scrutiny faced by financial institutions operating at the intersection of traditional banking and the rapidly evolving cryptocurrency market. It also underscores the importance of robust regulatory compliance systems to prevent misuse and to maintain investor trust in the financial landscape.